Saturday, January 10, 2015

Politics, Ideology, Micro and Macro

Some of those commenting on the debate have insisted that "macroeconomics" is especially driven by ideology. Microeconomics is held out as a more value-free, scientific enterprise.

Of course, "more" is a matter of degree. Still...

I would suggest that macroeconomics has three major areas of concern--inflation, the business cycle, and growth. Inflation, particularly when it is high, and the business cycle, particularly the recession phase, are of major political concern. While the economists who study these matters, like everyone else, probably consider these things important, it is really the focus of other academics, intellectuals, politicians, and the man on the street that results in ideology being thrust into the study of inflation and the business cycle.

What about other areas of economics?

Industrial organization is a field of microeconomics. Anti-trust especially, but other ares of regulation policy are involved. There is no consensus. Economists can be lined up according to their views-- more "market-oriented" or interventionist.

Labor economics is a field of microeconomics. Labor unions and various regulation such as the minimum wage are dealt with in this field. There is no consensus. Economists can be lined up according to their views-- more "market oriented or more interventionist.

I find it incredible when microeconomists hold up macroeconomists to criticism or even ridicule for the inability to come to a consensus. Come on! The minimum wage?

Public finance is an area of microeconomics. Writ large, it obviously relates to growth theory. The micro effects that would apply to a special excise on tires have obvious macro implications for a general tax on income. Keynes and his followers have long advocated the use of fiscal policy to manage aggregate demand to moderate the business cycle, or perhaps more specifically, to generate or hasten recovery from recession. But even leaving aside whether Keynesian fiscal policy is useful, there is no consensus about public finance whenever the implications are politically controversial.

Come on. Supply-side economics? All economists agree?

What about international trade theory? I am not sure whether anyone neatly has it in the micro or macro category. And while there is a near consensus among economists in favor of free trade, the area is very controversial because of all of the special interests that can benefit from trade restrictions. There is always great interest in the work of economists who can find the special cases where trade restrictions are beneficial. And, of course, there is no consensus about what policy is best exactly--unilateral free trade, negotiated trade agreements, fixed or flexible exchange rates--all areas of political controversy and no economic consensus.

I am sure that there are some areas of microeconomics where hardly anyone can see any policy relevance and it is all about complementing each other on mathematical elegance or looking at the significance of some empirical test. What is the cross price elasticity of demand for corn relative to soybeans? I am sure there are "practitioners" that are very interested in an accurate answer to that question. But unless it starts having policy significance--perhaps regarding farm subsidies--who is going to get worked up about it?

As for the dominant ideology among economists, I think Boettke is correct. Samuelson's political views were center left. He was the dominant figure in economics in the second half of the twentieth century. And the dominant economists before and after Samuelson were much the same.

It is necessary to go back to the nineteenth century to get to a point where maybe most economists were more libertarian and less social democratic.

The more modern free market economists--Friedman and Hayek along with their predecessors in the twentieth century and successors more recently-- became influential, but were always very much a minority in economics. Self-identified "Austrian" economists, including Hayek, were very much a minority among the minority of free market oriented economists.

Now, for hard-left quasi-Marxists, Samuelson is a conservative. As far as I know, Samuelson was highly skeptical of any effort to replace a market order with a new kind of society. He just favored (lots of) piecemeal reforms to "improve" the market system. For a hard left radical that amounts to effort to delay the day of reckoning for a system that should and will be surpassed by a new sparkling and wonderful future.

Also, I have never exactly understood the meaning of the term "neo-liberal" but for many on the left, Samuelson would seem to fit the bill.

But when I do read leftist attacks on neo-liberalism, they often use Friedman or Hayek as their foil, and then mischaracterize their views. Friedman and Hayek are made out to have the policy views of Mises, or even Murray Rothbard. (Noah Smith holds up Hoppe, a Rothbard acolyte and philosopher as an example of Austrian economics. Right.)

As for the policy economists that work in Republican administrations, they are certainly to the right of Samuelson, but the majority have been what is called "conservative Keynesians" with only a minority being followers of Hayek or Friedman. Of course, it always helps when the leading politicians, like Thatcher or Reagan sing the praises of some leading free market economist, but they, or their followers, hardly win the battles over policy. (Though economists of every stripe know that all sorts of policies are implemented by politicians against their advice.)

I don't know that we should have any confidence in Noah Smith's opinions on what any economists think other than himself, but surely it is possible that within the center-left mainstream, those slightly more to the left feel slightly more emboldened to defend or develop more extreme positions. Perhaps those who favored a return to 70% or 95% marginal tax rates had feared that such proposals would make them marginalized, and they now are emboldened.

But Boettke is correct about the big picture--an economics absolutely dominated by the center-left. The free market wing has always been a minority. The "Austrians" are a minority of that minority and approximately as marginalized as the hard left.